Thank you very much Mr Chairman, for giving me the opportunity to launch Sinews of War - The Defence Budget in 2003, and How We Got There, which was an interesting reminder to me actually, as to how we got there, and I found it useful. Let me say, before I begin however, I do not endorse everything that is in this report, you would be disappointed if I did and ASPI would have no role if all it were doing was putting down the Government position. I do endorse wholeheartedly however, the thrust of what comes through in this report about the need for financial accountability and best value for dollar in the Defence budget, a point that Hugh White pointed out to me when we met just earlier, before I came here today. I remarked to Hugh, I wish he had shown the same concern for the value of taxpayers' dollar in all of those ERC meetings when he was in the Defence Department, but he reminds me he did, and I thank you for that.
In 1996 when I first became Treasurer, the doctrine of defence was predominantly continental defence of the land mass of Australia, domination of the sea and air lanes which would be required for any invading force to come to Australia. In 1996 when I first became Treasurer, the Defence budget was not analysed by the Expenditure Review Committee. Defence was given a global allocation, at that time the global allocation was being maintained in real terms and it was not considered the role of the Treasurer, the Finance Minister or the Expenditure Review Committee to go behind the global budget. That was considered a matter for Defence.
At that time it was difficult to get any fix at all on the acquisition plans that Defence had, how much was being paid under them, how much was being drawn down. And in fact, for the first few Budgets that I was engaged in, we had to fight very vigorously indeed to actually get the right to look at line items of Defence expenditures. It wasn't until quite recently in fact that the Expenditure Review Committee won the right to go line by line through the Defence Budget as part of the budgeting process. It was stoutly resisted by Defence and it proved very difficult to come to grips with some of the items that lay behind the global budgeting.
The defence of continental Australia and the maritime and air approaches led to some of the big acquisition decisions which were made some time ago, the Collins Class Submarine being the most obvious example. The Collins Class Submarine, which could operate in warm waters to the north of Australia, was an acquisition which we entered into as part of the thinking to defend the continental land mass by denying any enemy the opportunity to mount maritime or air approaches to the mainland of Australia.
We are still dealing with the Collins Class Submarine acquisition. We are still trying to come to grips with the expenditures that were involved in that particular decision. I raise it as an illustration of the way in which decisions in Defence are made in circumstances which can change quite dramatically, and the financial implications of which can be felt long after a decision has been entered into. And as recently in relation to this Budget, with an allocation for full stage cycle docking of the Collins Class Submarine we were dealing with financial implications of a decision which was made probably 15 years, nearly 20 years ago. These decisions come back to haunt you, or at least to concern you, a very long time after they have been made.
In 1996 I don't think it would have been thought that Australia would be engaged in East Timor, in Afghanistan, in Iraq or the Solomon Islands. In 1996 we expected that in this financial year, 2003-2004, defence expenditure would be around $12 billion. In fact it will be over $15 billion. That is an increase of around 25 percent on what we were expecting for the 2003-2004 year.
Since coming to office, this Government has provided additional funding, that is funding over and above the forward estimates, which were maintaining in real terms, additional funding over and above those forward estimates at some $38 billion. Since coming to office this Government has provided additional funding, that is over and above the forward estimates of some $38 billion in respect to Defence. A very large part of that of course is the Defence White Paper, providing an additional $27 billion over ten years.
In the most recent Budget, the 2003-2004 Budget, I announced new spending of $2.1 billion, including $1.3 billion to enhance logistic support for a range of platforms, the establishment of a special operations command, and we also, in addition, and this is not counted as Defence spending, placed an additional $1.8 billion into strengthening Australia's domestic security arrangements.
Now in 2003-04, that $15 billion of expenditure will amount to a little under 2 percent of GDP, around 1.9 percent. There are some people that argued that is still not enough, that we should be spending more than 2 percent of GDP. Let me make the point, and I think it is made very well in this paper, that it is a false analysis to determine Defence expenditure as a proportion of GDP, because there are two variables in any such analysis.
The first is Defence expenditure, the second is the size of your GDP. We could cut Defence spending but increase it as a proportion of GDP by throwing the economy into recession. We could cut Defence expenditure but increase it as a proportion of GDP by throwing the economy into recession. Would Australia have a stronger Defence Force? No. Because you would be increasing the spending to GDP ratio by dealing with the second variable. One of the reasons why Defence expenditure is still around that 2 percent mark of GDP notwithstanding the very significant Defence build up, is that the Australian economy has grown so strongly.
If the Australian economy had grown at trend rates back in the late 1990s rather than a 4 percent plus rate, then our Defence spending to GDP would have gone through that mark. If the Australian economy had followed the US economy into recession in 2000-2001, then the Defence to GDP ration would have gone through that mark. That's why the important thing when you look at Defence expenditure is to look at the actual amounts, rather than to judge by Defence to GDP ratios.
The second point I am going to make here is this, your defence capacity increases with the economic strength of the country. Your defence capacity increases with the economic strength of a country. What gives a country the capacity to maintain defence is a strong economy. It gives it the technological capacities, it gives it the spending dollars, it gives it the people skills. And I have always believed that an important component of a strong defence in Australia is a strong economy which is underlying it. And we would never improve the defence capacity of Australia by undermining, by taking a decision which undermined our economic strength.
Now the third point that is made in this piece of valuable research is that notwithstanding the increase in Defence expenditures, it is important that we have heightened scrutiny in relation to the way in which the budgets are managed, and the way in which that capacity is developed. With that, I agree.
It is important, not just that we allocate the dollars, but it is important that we are getting full value, efficient value in the decisions that we make. Now we know what some of the difficulties are in relation to defence. Some of the difficulties are, when you are engaging in capital acquisition you are buying product which has not yet been invented. It is very hard to buy a product which has not yet been invented. If you were only buying a product which had been invented it might be effective now, but in the ten and fifteen year timeframes that you are looking at would be outmoded before it came into use.
The Collins Class Submarine is an example of that. A decision was made to take a submarine which had not yet been invented, it had to be built from scratch. The Joint Strike Fighter is another decision. Australia is now engaged in assisting with some of the research, but we don't actually know what is going to be produced yet. We don't know what its capabilities, we don't know if it will be technologically up to the standards which we require, and you are operating therefore in very long timeframes. That is a difficulty in relation to defence planning. Something which I can't see any easy way of getting over, but I do know this, that as we improve our management systems, as we allow in relation to defence acquisition, not just capital costs, but depreciation costs, running costs, repair costs, as we heighten our financial management we will get better handles in relation to those issues than we have had in the past.
It will be said, no doubt, as a result of what appears to be the media grab coming out of this report, that the Defence Capability Plan is undeliverable. I do not believe that to be the case. The Defence Capability Plan is deliverable, and the Government intends to deliver. But it intends to deliver a capability which meets the current situation as we now apprehend it. This is the important point. It is important when you are looking at defence capability to know the challenges that you want to meet. The challenges that have arisen, which we didn't foresee in 1996, the challenges like the threat of international terrorism, the war on terrorism, the challenges that we now see in the Solomon Islands, with Australia playing an active role in bringing stability to a country which threatened to become a failed state.
It would be wrong in relation to defence capability to say, what was set in a previous environment is immutable. As we said at the time, these things must always remain under review, so that we meet the capability which is required according to the best efforts and the best understanding at the particular time. Constant review, constant attention to the security environment, constant determination to meet the capability and to do it in the most effective way. And the points that are made in this report that underline that, I wholeheartedly and thoroughly agree with.
Can I say to ASPI, this is a valuable contribution to the debate. I think that by unlocking this debate outside of just defence circles, we will get a better understanding, just as I think unlocking that global budget of Defence back in 1996 gave central agencies and the Government a better opportunity to contribute to the financial management issues and the important issues of the defence capability of Australia. And with that, I officially launch the Sinews of War - The Defence Budget in 2003 and How We Got There, a valuable read, not every word of which is endorsed by the Federal Treasurer, but a valuable read nonetheless. Thank you very much.